Monday, December 1, 2014

Gas prices vs. average hourly wages

- by New Deal democrat

One of my goals is to bring you "value added," in other words, rather than simply updating you on the day's data releases - there are a slew of sites that do that - I want write about important topics that I think are being overlooked.

That's why I have harped so much on the price of gas over the last 5+ years.It was in no small part because of $4.25/gallon gas in June 2008 that the American consumer threw in the towel, intensifying what had previously only been a mild downturn, if that. Similarly, $1.45/gallon gas in December 2008, in the very teeth of the general cliff-diving, marked the point where consumer spending stabilized. This suggested that downturn might hit bottom at or about the anniversary of that $4.25 peak (as YoY consumers had significantly more to spend).

How much pressure? Here is a graph of gas prices deflated by average hourly wages - in other words, what percent of an hour does the average worker have to work, to afford a gallon of gas:

As you can see, this was more or less steadily rising from 1999 through summer 2008. It more or less stabilized near that peak for the last 3 years. Note that the above graph ends in October. Since gas prices fell on average close to 10% during November, we can expect a value a little over 0.14 once the jobs report is released this Friday.

The relationship between gas prices and GDP is not linear. In general, up to a point (approximated at $4/gallon over the last 10 years in the graph below, red), the lower the price of gas, the higher the quarterly GDP (blue). Once the recession began, however, lower gas prices correlated with lower GDP.

The bottom line is that this quarter's lower gas prices should lead to higher GDP, perhaps not in this quarter, but very likely by Q1 2015.